Previously, employees who were laid off or fired received an unemployment check every week until they got another job. This is paid for by employers, at least partly. That means anyone an employer fires will usually have to keep paying them until that person gets another job.
The FUTA tax is an important one for employers. It stands for Federal Unemployment Tax and it means employers must pay for a portion of unemployment payments. If you do make any such payments, you’ll have to fill out Form 940. This is a record of the annual payments you made towards this scheme.
There are seven sections and to fill them in properly you’ll need to make sure that you have good records.
What is Form 940 and What is the Federal Unemployment Tax Act (FUTA)?
FUTA is the reason there’s a Form 940 in the first place. The act states that employers must pay 6% for the first $7,000 their employees earn. The amount you pay to the Federal government can go down based on how much unemployment tax you pay to your state. As you can expect, this is heavily determined by the state you operate in.
In some states, you can pay as little as 0.6% to the Federal government on the first $7,000.
Every year you need to fill out Form 940. This can be done manually or through your preferred payroll software.
Who Needs to Pay Under FUTA?
The vast majority of businesses that employ people must pay unemployment tax under FUTA. The threshold is extremely low. For a start, if you paid out more than $1,500 in wages to employees in any calendar quarter, as of 2016, you’ll have to pay FUTA.
Also, you’ll need to pay if one or more of your employees worked during 20 different weeks in 2016. This applies to full-time, part-time, and temporary workers, so there’s no way of getting around it.
The only way you can avoid paying is by employing independent contractors. Since independent contractors handle their own taxes and aren’t classified as employees the above two criteria don’t apply. This is precisely why so many small businesses prefer to hire independent contractors. They also don’t have to pay payroll taxes or for any work benefits.
How Much Tax Will You Have to Pay?
The basic tax rate for FUTA is 6% on the first $7,000 earned by each employee. If you pay out more the amount of tax doesn’t move. So, the maximum you can pay out, in theory, is $420. But that’s not the full story because there are also state unemployment taxes to consider.
Known as SUTA, these are also paid every year and the amount you pay depends on the state you live in. Make sure you pay them before your FUTA payment is due so you can deduct the relevant amount for that tax year. With SUTA, you can pay as little as 0.6% to FUTA.
Most states are eligible for a 5.4% credit offset against SUTA, so the amount you pay into FUTA will be $42 per employee, if you happen to live in one of those states. Take note that not all 50 states have this agreement in place.